HH 11 Investing And Personal Finance Hacks

You’ve probably seen one or two of the listy articles about life hacks which are little tricks that can make the day to day routine a little easier. Some are for very mundane aspects of life like using a paper clip to mark the spot where the roll of tape starts or laying a wooden spoon across a pot of boiling water to prevent it from boiling over. I saw one of these lists a few days go where one of the hacks was a little off the beaten track, suggesting you always carry bolt cutters with you.

These are relevant to other aspects of life too. I give out little rolls of duct tape to my colleagues in the fire department to keep in their wildland fire packs (I am the chief of the all-volunteer department where I live). In addition to everything else you might use it for it also comes in handy for blisters. There are also hacks for all aspects of investing, investment management and personal finance.

1. To include financial professionals, the first one is remind clients regularly that markets can go down a lot. Ideally they will get to the point that they will simply accept it as true that markets go down, scareother investors, and then recover over some period of time. Clients need to be reminded of this so they don’t panic, sell out after a large decline and then watch the market rally back from sideline.
2. Don’t carry balances on credit cards. You’re probably thinking, yeah, everyone knows that and while they might know it, they don’t live it so it is worth including here. Although the stats are a couple of years old, Nerd Wallet reported that at the end of 2013 46% of households had a credit card balance with an average of $15,257 owed. The numbers might be a little different now but it’s not like the numbers went from 46% back then to 8% now.
3. Manage your clients’ portfolios conservatively. Obviously suitability comes into play here but the point with this is that it is far better to have tough conversations with clients where their starting point is impatience, why don’t we have more exposure to the thing that is hot now, than when their starting point is panic.
4. Manage your own portfolio conservatively. Mediocre returns when combined an adequate savings rate can get the job done in terms of having enough when you need it. Here the word mediocre is a synonym for boring. Investing should not be a thrill ride, it should be boring. Another way to think of this point is that with an adequate savings rate you don’t need to take quite as much risk with your portfolio than you’d otherwise have to do.
5. Avoid investment dogma. People at Bogleheads passionately defend indexing, people at Seeking Alpha passionately defend dividend growth and I am sure that there are other sites where people passionately defend swing trading, penny stocks and everything else. Passion is an emotion and ideally there should be less emotion in investing not more. Save the passion for your work, sports team or your volunteer work.
6. You don’t need to beat the market. You need to have enough accumulated for your goal (presumably retirement). There will be times where you do beat the market and times where you don’t. All that matters is whether you have accumulated enough for when you need it. Financial professionals don’t need to beat the market either, they need to give their clients the best chance possible for having enough for their goal and then spending through that goal. Along the way the financial professionals also needs to be there to prevent clients from giving into emotion (fear or greed).
7. True diversification is important. What this really means is not getting impatient with diversification. If everything you own has gone up a lot in the bull market then you’re probably not as diversified as you think because if everything went up with the market, then what is likely to happen when the market goes down? In terms of managing money for clients it is common for them to ask why don’t we have more equity exposure when the market is going up and then for them to ask why do have so much equity exposure on the way down. Where no one can truly know when the market will turn which makes the case for always maintaining at least a little exposure to market segments or strategies that you expect will have a low correlation to equities.
8. Your house isn’t an investment? That’s sort of right. It used be set in perceptual stone that real estate can’t go down in value. That myth was of course shattered by the Great Recession and so came a new and somewhat widely accepted sentiment that your house is not an investment. I don’t think that is quite right however. Buying a house with the expectation of selling it for a profit sometime in the next five years has certainly been revealed to be a crapshoot but the idea that house can no longer offer some modest positive return over a longer period of time seems like an overreaction in the other direction. In 2013 we sold our cabin (primary residence) after 15 years for about double what we paid. Yes it was down a lot from what we think the peak value was but the return was still more than adequate. With this sort of thing there will always be great success stories as well has horror stories but buying a house to live in long term is still a fine idea but now price matters.
9. Live below your means. Everyone knows they should do this but how many do? Living below your means makes every aspect of financial planning easier and makes absorbing some sort of financial shock much easier.
10. Defining success. We all have our own definition of success but I would say if you are able to pay the bills, have an adequate savings rate and have a little left over for whatever your idea of fun might be then you’re pretty well of regardless of the dollars involved.
11. There is no way to know what the future you might want to do.This can be tied to number ten about success. If you decide you want to do something completely different with your life such that there would be little to no income then you obviously need to have had a high savings rate over the years. If your job comes to make you unhappy but don’t have the financial flexibility to make a change then something will have to give and that probably would be happiness.